US embassy cable - 05SANAA326

UNCLAS SECTION 01 OF 02 SANAA 000326 
 
SIPDIS 
 
SENSITIVE 
 
E.O. 12958: N/A 
TAGS: EPET, ECON, YM, ECON/COM 
SUBJECT: POSITIVE ECONOMIC NEWS FOR YEMEN: LNG DEAL TO BE 
FINALIZED BY END OF MONTH 
 
1.  (SBU) Summary: Yemen's first billion dollar direct 
foreign investment project since the USS COLE Attack is near 
completion. The Yemen Liquefied Natural Gas Company (YLNG) is 
set to sign a major deal with the Korean Government to supply 
LNG for 20 years to the Korean Gas Company (Kogas). 
Jean-Francois Daganaud told Pol/Econ Deputy on February 8 
that the project was complete except for some "red tape."  He 
expects the deal to be inked this month.  Beligan based 
Tractebel also announced an initial agreement to buy 2.5 
million metric tons of natural gas from YLNG, likely to 
supply its two U.S. processing facilities.  With these two 
offers in hand, Yemen LNG will shortly begin building a 2.5 
billion dollar two train LNG plant.  If all goes well, the 
first shipments will begin in late 2008.  End summary. 
 
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ROYG almost gave up on LNG deal 
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2.  (SBU) The Korean and Tractabel deals would be Yemen LNG's 
first business deal since its founding in 1995.  Yemen LNG is 
jointly owned by Total who owns a 42.9 percent share, Yemen 
Gas Company (23.1 percent), Hunt (18 percent), SK Corporation 
(an affiliate of the South Korean Group - 10 percent) and 
Hyundai (6 percent).  A long-time Total employee,  Daganaud 
blamed the late 90s Asian economic collapse and subsequent 
security concerns in Yemen for the lack of a LNG buyer. 
According to Daganaud, the LNG market is heating up, 
especially with the advent of American buyers.  Alluding to 
Yemen LNG Company's "difficult history," Daganaud said that 
he kept negotiations with the Koreans and Tractabel quiet in 
order to keep expectations low.  Houston based Hunt Oil 
representatives told Ambassador last year that government 
officials were considering revoking YLNG's gas concession due 
to non-performance.  Hunt officials also repeated allegations 
that Total was using Yemen as a reserve until Qatar's gas 
contracts are finalized. 
 
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Near Finalization with Tractebel and Kogas 
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3.  (SBU) According to Press Reports, Yemen LNG was the 
lowest of five bidders to supply natural gas to the Korean 
Gas Company (Kogas), although Daganaud admitted that the 
large Korean ownership in YLNG helped their proposal.  The 
South Korean tender was divided into three separate contracts 
between 1.5 and 2 million metric tons a year for LNG. 
According to some estimates, the total tender will be worth 
over 20 billion USD.  Total Upstream Head Chistophe de 
Margerie met President Saleh in early February, and Draganoud 
said the meetings went very well.  Margerie told London-based 
Arabic daily al-Hayat that Total will also take 2 million 
tons a year of LNG.  Daganaud stated that the Korean deal was 
99.9 percent certain.  Press reports the week of February 14 
also noted that Yemen LNG signed a Heads of Agreement with 
Tractabel for 2.5 million tons of LNG a year.  While 
officials at Tractebel remain silent on where the LNG will be 
shipped, most experts report that the gas is intended for its 
U.S. plants in Massachusetts and Louisiana.  According to the 
reports, the Tractabel agreement is waiting for Yemen 
government approval.  Between Total, Tractebel and the Kogas 
contract, YLNG would have buyers for its production capacity. 
 
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Near Certainty on Plant Construction 
----------------------------------- 
 
4.  (SBU) YLNG commissioned two front end engineering studies 
on building a two train LNG plant in Bal Haf in the Shabwa 
Governorate 200 Km SW of the port of Muklalla.  (U.S Bechtel 
and France's Technip designed plans are the front runners to 
win the tender.) A 320 Km pipeline from Hunt's Block 18 PSA 
will be built to supply the plant, which will have a 6.5 
million metric ton per year capacity.  Yemen LNG will invest 
2.5 billion dollars over four years to make the plant 
operational by the end of 2008.  When asked about security, 
Daganaud said the pipeline will be underground and the 
company plans an education campaign to explain the dangers of 
LNG pipelines. 
 
5.  (SBU) Daganaud explained that YLNG has the concession for 
all of the LNG in Hunt's Block 18 in Marib.  Affirming that 
the gas operation is not connected to Hunt's lengthy 
PSA-negotiations, Daganaud assured Pol/Econ Deputy that YLNG 
would have no Parliamentary interference in its activities. 
Hunt GM Wyndell Caviness cautioned that if the Hunt PSA 
extension (reftel) did not get approved by Parliament, the 
South Koreans may get scared and cancel the deal. 
 
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LNG To Replace Oil Declines? 
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6.  (SBU) Comment: With oil production declining, LNG sales 
offer the first viable alternative to the ROYG's nearly 
complete dependence on oil revenue.  Yemen LNG claims that 
there are 10.2 Trillion Cubic Feet of natural gas reserves in 
its concession.  While the LNG market is hard to predict, it 
is unlikely that LNG production will be fully able to 
compensate the nearly 3.5 billion dollars of revenue Yemen 
currently receives from oil.  Still, the YLNG deal, once 
finalized, is the most significant step toward economic 
sustainability Yemen has seen in several years.  If YLNG is 
successful, more foreign direct investment could be 
forthcoming.  End comment. 
Krajeski